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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2018

Follow the Golden Rule

Successful deals hinge on listening to lenders who control the cash

Follow the Golden Rule

When presenting a loan application to a lender, the watch words are simple. Find hard, factual, detailed numbers from verifiable third parties to support the loan request. Look at marketplace demographics that will support occupancy of a new office building or assisted-living facility. Remember that a new 100,000-square-foot supermarket is rarely built in a strip mall across the street from another anchor-tenant supermarket.

Lenders need factual information about where a property’s debt service comes from so they can determine how the loan will be repaid. And they will typically order their own appraisal to properly assess value.

Imagine the following scenario: A banker is sitting at his desk, looking at spreadsheets of closed loans and funded projects, when the phone rings. It’s John from Indiana, who tells the banker he knows Peter in Texas — who had worked with the banker previously to secure a construction loan for an assisted-living facility.

John begins the conversation by telling the banker about his own vision — building a 120-key hotel on land that has been family-owned since the early 1900s. The project would sit next to rolling hills and the perfect, idyllic stream. John projects the hotel will operate at 100 percent occupancy during the county fair, 75 percent occupancy during corn-harvesting season and at least 60 percent occupancy for the rest of the year.

John then suggests he only needs to borrow funds to complete construction. Building permits will be easy to obtain, he says, because his cousin is on the town committee that issues them.

Confirm the value

The banker, of course, asks John some hard questions, beginning with how much money he wants to borrow. John tells the banker he needs $7 million — enough to cover his $6.5 million construction budget, an interest reserve and contingencies. The bank doesn’t need to worry, John adds, because the land alone is worth more than $12 million, according to another of John’s relatives, a certified ap-praiser who has lived in the town for a long time and is familiar with every local real estate deal.

The banker then asks John how much money he has invested in the deal. John says the value of his family-owned land should be more than enough to serve as collateral and that the institution should be more than safe doing the loan. After the banker asks him if it’s OK to have an independent appraisal done by a company the bank is more familiar with, John barks at the banker and tells him his projections are spot on.

It may be more efficient and less costly to have
a lender obtain the actual appraisal.

Experienced commercial mortgage brokers and borrowers know how this story concludes, yet it happens to lenders often. If you indeed want to close loans, one of the best approaches is the simple, honest recognition that a principal lender will always want to confirm the value of collateral by having their own appraisals prepared by nationally recognized experts in the field. When preparing a presentation to a lending institution, recognize the principle of “he who has the gold makes the rules.”

If a lender is disbursing funds for your project, they will have a set list of third-party reports to order.  Prepare your loan request with the recognition that the lender will need to have such reports, including — but not limited to — the appraisal, environmental reports and possibly a third-party review of operating-business plans and projections. Although it is always a good idea for a mortgage broker and borrower to know the value of the assets in question, it may be more efficient and less costly to have a lender obtain the actual appraisal, as opposed to providing it and asking the lender to accept it. Why pay for an appraisal twice? Be realistic.

Know the competition

Assessing any loan application is dependent on several factors that generally remain the same, although they may be slightly different for each asset in question. Lenders will often want a market assessment of competition. This should include both existing and projected new entries in the market involving the asset class under consideration. Why would a lender contribute to a hotel project if the local market cannot support existing hotels through acceptable occupancy numbers, which are required for good profit margins and higher debt-service coverage ratios?

This simple analysis holds true for many asset classes, from retail construction and golf courses to general office space. If the market has reached a point where the current asset class is serving the needs of the community, then even the best piece of raw land will have limited success.

When considering the factors of competition in any market, one needs to understand the simple demographics of the market and compare them to the number of hotel rooms, golf courses or assisted-living facilities. This is simple math all lenders will do, and the data is readily available. With construction of a new assisted-living facility, for example, a mortgage broker should research the senior population in the relevant geographic market and compare it to the current number of assisted-living beds there.

If the data supports the construction of a new facility, this can form the basis of your loan presentation. Indeed, it also can provide a foundation for the eventual lender-ordered appraisal. Doing your homework before the loan presentation, however, will always provide a strong foundation from which a lender can proceed before committing to your loan.

Find relevant data

In the current environment for commercial real estate, most lenders do not have the time or staffing required to gather what their loan committee needs in order to close a deal. Without regard to the asset class, when you are preparing for an initial presentation to the lender, gather detailed and verifiable facts the lender can rely on and confirm.

Present data on comparable properties and logical reasons for why the prospective property will be successful. If you are proposing a new office development, for example, know the occupancy rates and rent rolls for the nearest competition, as well as who their tenants are and how your project will achieve sufficient occupancy — backed by realistic, locally focused data rather than more general, global-occupancy statistics.

Finding local data about recreational golfers (if it is a golf-course loan), the area’s hotel occupancy rates or the number of assisted-living beds within a specified radius can become the basis of a presentation that will make your proposal more viable to a lender and create an opportunity for a more detailed conversation. Lenders are numbers people, and they need facts to support the basis of their approvals.

Most lending institutions want confirmation that the borrower
fully believes in the project and is willing to invest their own capital.

Remember that call from John? There was a question of how much money John had invested, or would be investing, in the deal. In today’s commercial real estate world, although the loan-to-value ratio is important, and John’s relative had indeed provided what might be a viable piece of land for the new hotel, a lender can see that John has nothing at risk.

Most lending institutions want confirmation that the borrower fully believes in the project and is willing to invest their own capital. Although it is nice to assume the lender will provide the majority of funds needed to build the dream, it is unrealistic to expect a high amount of leverage to be disbursed. Be prepared to have a lender propose a reasonable loan-to-cost amount and understand that very few lenders will approve a loan-to-cost ratio of 90 percent or more based on a borrower-obtained appraisal.

The most logical approach is relatively simple. Present the lender with hard facts and good research, and be open about the loan request while making the lender your partner. Ask the lender for candid advice about what their institution wants to see in the request. Be aware that the lender will likely want to engage third parties and — even though your locally obtained appraisal may be of help in determining the lender’s initial interest — they will typically require their own appraisal.  

• • •

Lenders are not particularly interested in whether your project will have beautiful landscaping, the nicest color on the block or a concrete parking lot, rather than blacktop. They need hard, factual support about debt-service sources and how the loan will be repaid. Present the deal with good numbers backed by solid research and you are on the road to more closed deals. 


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